Shares of First Union Corp. and other banks plummeted Wednesday after the Charlotte, N.C., banking giant sharply cut its forecast for 1999 earnings growth, citing accounting changes, spending increases, and economic uncertainty.
Growth in earnings per share will be in the "mid to high single digits," said chief executive officer Edward Crutchfield, backing away from a long- held forecast of double-digit growth.
The statement, issued late Tuesday, came two weeks after the superregional banking company announced a 34% jump in earnings for 1998. It infuriated analysts and sparked a slew of downgradings.
BT Alex. Brown, Goldman, Sachs & Co., Lehman Brothers, and PaineWebber downgraded First Union shares Wednesday morning, sending its stock as low as $50.625 a share, down nearly $7 from Tuesday's close of $57.0625. The stock closed Wednesday at $52.125, as the S&P bank index sank 3.37% to lead a broad market selloff.
Bond investors, who tend to take a longer view than stock investors, reacted favorably, saying First Union's abandonment of gain-on-sale accounting would improve the quality of its earnings. (See article on back page.)
"I find it hard to believe" that First Union didn't know about the economic and accounting issues when it issued its 1998 earnings report, said Diane Glossman of Lehman Bros. She downgraded the company's shares to "neutral," from "outperform," and cut her projection of 1999 earnings to $4, from $4.30 a share.
The reduced earnings forecast caused some to question First Union's long-term strategy. The company's difficulties with integrating CoreStates Financial Corp. of Philadelphia, which it bought last April, have been all but forgiven by investors on expectations of decent 1999 earnings, analysts said.
"A year ago, they said to investors, 'The fruit of our acquisition activity will be 12% to 14% earnings growth in 1999,'" said George Bicher of BT Alex. Brown. "Now they go and do this!"
Mr. Bicher downgraded First Union stock to "market perform," from "buy," and revised his 1999 earnings forecast to $4.10 a share from $4.40.
First Union "seems to be somewhat insecure" about its competitive position, said Mr. Bicher. "At some point they have to pay attention to near-term performance. They need to rebalance their perspective."
During a Wednesday morning meeting with analysts and investors held by Salomon Smith Barney in New York, First Union president John Georgius indicated that 1999 earnings per share figure would "start with a 4."
He also said that the company had failed to get $50 million of the $300 million in cost savings it expected from the acquisition of CoreStates because federal regulators delayed the deal's approval.
A First Union spokeswoman said Wednesday that "economic volatility" just as the company released its earnings report had prevented it from changing 1999 expectations. "We were changing assumptions on our budgets. Everything was in flux," she said.
The company said it will eliminate its use of gain-on-sale accounting when it securitizes subprime loans. Dropping the controversial method will cut 1999 earnings by eight to 12 cents a share, Mr. Crutchfield said. This is about half the announced decline in expectations for earnings growth.
The accounting method lets lenders record profits on loan securitization before the loans are actually sold. Writedowns after overoptimistic assumptions last year led subprime specialists to cut earnings drastically, demolishing their stock prices, spooking investors, and provoking some analysts to call for regulatory action.
First Union's action touched off new questions about its 1998 purchase of Money Store, a home equity lender.
First Union raised eyebrows in July, saying it would take a $2.2. billion "accounting adjustment" related to its $2.1 billion Money Store deal.
First Union has maintained since it signed this deal that it would be immediately accretive to earnings. In July, it said the deal would add 4 cents a share to 1998 earnings and 8 cents a share in 1999.
The company's decision to drop "gain-on-sale" accounting was made in the "past few days," the spokeswoman said.
First Union will also increase investment in "strategic initiatives," Mr. Crutchfield said. Analysts said more money would be spent on advertising and revamping the company's retail branch network, initiatives that are expected to cost from six to 10 cents a share.
Not all analysts were taken aback. Charles Peabody, a Mitchell Securities Inc. analyst, has maintained a "sell" rating on First Union since Dec. 14.
"I've always questioned whether the synergies of all their acquisitions are really there," Mr. Peabody said. First Union could also be increasing spending on year-2000 readiness, Mr. Peabody said, noting that the company has spent less than its peers so far.
Some analysts said the unexpected is par for the course at First Union. "If you're surprised by First Union taking a charge, then shame on you," said Sean Ryan, a Bear Stearns analyst. He rated First Union stock "attractive" after its fourth-quarter earnings report.
"The vexing thing is, it's a great bank, operationally, but the value just isn't finding its way to shareholders," Mr. Ryan added. "It's been a bumpy ride for the past few years, and today proves that that's not letting up."